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Four certified public accountants at a Japanese unit of the PricewaterhouseCoopers Group were arrested Tuesday for allegedly collaborating with former executives at Kanebo Ltd. to falsify accounting reports.

The special investigation department of the Tokyo District Public Prosecutor’s Office also searched the offices of ChuoAoyama PricewaterhouseCoopers in Chiyoda Ward, Tokyo, and the suspects’ homes jointly with the Securities and Exchange Surveillance Commission, prosecutors said.

Pursuing criminal responsibility of certified public accountants in connection with window-dressing is unusual, and the arrests have blemished the credibility of those assigned auditing responsibilities, observers say.

The accountants under arrest were identified as Kuniaki Sato, 63, Seiichiro Tokumi, 58, Kazutoshi Kanda, 55, and Kazuya Miyamura, 48.

They are suspected of working together with two Kanebo executives to produce false consolidated financial statements showing that Kanebo’s assets exceeded its liabilities in fiscal 2001 and 2002, when in reality its liabilities exceeded its assets by 81.9 billion yen and 80.6 billion yen in the two years.

Prosecutors determined that the suspects’ actions were highly malicious as their alleged involvement in the affair spanned a long period and they even made suggestions to former Kanebo managers on how the books might be cooked, investigative sources said.

The two Kanebo executives are former President Takashi Hoashi and former Vice President Takashi Miyahara. They have been charged with falsifying the company’s consolidated account statements.

The prosecutors suspect the four accountants were aware that the financial statements were forged but approved them anyway after discussing the situation with Kanebo executives. The statements were submitted to the Kanto Local Financial Bureau of the Finance Ministry.

Kanebo is currently undergoing restructuring under the government-backed Industrial Revitalization Corp. of Japan.

It has pulled out of the textile business and its cosmetics division was spun off to enable the company to concentrate on pharmaceutical products, foods and sundries. It was delisted from the Tokyo Stock Exchange in June after the fabrication of the financial statements came to light.

The SESC is expected to file a criminal complaint soon against the four accountants with the Tokyo prosecutors.

ChuoAoyama is a major accountancy firm set up in 1968 and currently has some 1,800 certified public accountants. It was previously sued by shareholders of major companies that collapsed, including Yamaichi Securities Co., for which it was the accountant.

In the Yamaichi case, ChuoAoyama forfeited auditing fees for failing to discover that the brokerage fell into negative net worth in the year that ended in March 1998.

ChuoAoyama is currently fighting a lawsuit by shareholders of Ashikaga Bank seeking damages for allegedly lax auditing work that led to the bank’s bankruptcy in 2003. The firm issued a statement Tuesday saying the arrests of the four accountants were “unexpected” and it takes the situation seriously.

“Since the Kanebo affair came to light, we have been cooperating with the present (Kanebo) management to clarify what went on, but (the arrests) are very regrettable,” it said.

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